ATC’s “Beggar Thy Neighbor” Strategy on Electric Transmission

With a new year comes new legislative sessions, and new attempts by special interest to craft laws to their own advantage. A case in point are right of first refusal (ROFR) laws for electric transmission. ROFR laws, which exist in a number of states, prohibit transmission projects from being awarded via a competitive bidding process, and instead give incumbent utilities the exclusive right to build, own, and operate new transmission projects.

A utility’s profit is determined by applying a set percentage to the amount of money the utility has invested: The more a utility invests, the more money they make. ROFR laws appeal to electric utilities because it means they make more money. They should not appeal to consumers, for whom the lack of competition means higher prices. Research finds that competition saves customers 20-30 percent per transmission project over the cost of letting incumbent utilities build it. A recent study found that Minnesota’s ROFR law added $180 million a year to residents’ electric bills.

Competition has led to a variety of innovative practices to lower costs to consumers and protect them from downside risk. A bidder may agree to cost caps that protect against cost overruns, or may accept a lower rate for its “return on equity” (basically its profit rate) than utilities are willing to accept. While utilities are allowed to enter the competitive bidding process, without competition they have no incentive to enact any of these cost saving measures.

In the past, utilities claimed competition would not lower prices. Given their profit motive, this is hardly a convincing argument. A new utility-funded study looking at the potential effects of a ROFR bill in Wisconsin is making a different argument. According to this study from the American Transmission Company (ATC), ROFRs may make transmission more costly to build, but that’s okay because the extra costs can be shifted onto consumers in other states.

This study begins with the fact that multiple states share the costs for regional transmission projects. This means that when a state enacts a ROFR law, the higher costs fall not only on the citizens of that state but also on the citizens of neighboring states. For example, research R Street conducted on a group of transmission projects approved in 2022 by the Midcontinental Independent System Operator (MISO), which operates the electric grid throughout much of the Midwest, found that ROFR laws increased costs to Wisconsin citizens to the tune of $175 million.

The ATC study takes this a step farther. According to the study, if Wisconsin enacted ROFR, ATC could take advantage of technical aspects of the cost allocation process to foist some of its pre-existing grid costs onto consumers of other utilities and in other states. By contrast, if a new entrant were to win the bid, they would be unable to use the same trick to shift pre-existing costs to other states because as a new entrant they would have no pre-existing grid costs. Thus, even though the ROFR projects would cost more, Wisconsin residents would pay less than with competition because they could stick other states with unrelated costs that Wisconsinites are otherwise already paying for today.  

The ATC study is methodologically flawed in various ways. The size of the study’s purported cost savings (or cost shift to consumers in other states) is overstated. Unlike the R Street research cited above, the author of the ATC study failed to account for the fact a dollar in the future is worth less each year than it is today. Additionally, while a new entrant would start out without a large stock of existing costs that could be potentially shifted to other states, over the course of 40 years it could very well develop such a base upon successfully winning competitive proposals. So, even if the cost-shifting mechanism described in the study were appropriate and perpetual, it would not follow that a transmission line built by a new entrant through competition would not be able to take advantage of it after shedding its “new entrant” label.

In any case, all this is hardly a good argument for ROFRs. For one thing, other states aren’t likely to be pleased at the thought that Wisconsin (or any other ROFR state) is deliberately shoving unrelated costs onto those other states’ consumers. Illinois has already been fighting what it views as unreasonable transmission cost allocation from other states for over a decade. Having it on the record that Wisconsin means to enrich its own utilities by sticking its neighbors with the bill for overpriced transmission is not likely to promote comity in the region.

Further, the rules of schoolyard also apply to transmission cost shifting: Two can play at that game. If Wisconsin tries to use ROFR to shift costs onto other states, those states can use the same silly tariff mechanism to shift costs back onto Wisconsin. The end result, aside from a lot of bad blood, is that everyone ends up paying more and the only winners are incumbent utilities.

Finally, arguments such as the one made in the ATC study could prompt federal intervention in one form or another. The U.S. Constitution prohibits states from discriminating against out-of-state businesses. Litigation on this subject is ongoing, and federal judges in Texas and Indiana have held that ROFR laws are unconstitutional because they only allow in-state incumbents to be awarded projects. The Trump administration likewise has expressed concern about the anti-competitive nature of ROFR. The ATC study could be Exhibit A in support of an argument that a Wisconsin ROFR would be an attempt to unfairly discriminate against other states.

States should be looking for ways to reduce overall costs, not try to shift higher costs to others by playing a game of regulatory hot potato. R Street has written previously about the possible use of interstate compacts to defuse the ROFR issue. But nevertheless, ROFR remains a bad policy that will only serve to increase costs to consumers.